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As the clock ticks toward the Oct. 1 closing of the historic $1.9 billion deal to lease city-owned Memorial Health System, city officials last week assured clear sailing toward the "exciting new partnership" with University of Colorado Health.

But don't let the cheery press releases fool you.

The city remains locked in a major dispute with the Public Employees' Retirement Association over how much, if anything, it owes to assure that Memorial's 4,000 employees receive retirement benefits after leaving the system to join UCH.

A loss in court could mean that seed money for a much-discussed community foundation is gone. And, oddly enough, a win could be devastating in its own way.

That's because if the city succeeds in extracting Memorial from PERA without paying a dime, it could send the agency's Local Government Division into a financial tailspin. A legislative rescue might mean authorizing sharp increases in employee and employer contributions on behalf of the remaining members, which include people in 144 governmental entities across the state — among them 3,275 total workers with the city of Colorado Springs and Colorado Springs Utilities.

In fact, PERA estimates the city of Colorado Springs would owe $88 million if Memorial dissociates without making a termination payment.

Besides all that, it remains unclear whether the deal will shake out as advertised to voters, who approved the lease by a nearly 5-to-1 margin last month. Though City Attorney Chris Melcher maintains there's adequate money to pay off Memorial's debt and that there are no lingering Taxpayer's Bill of Rights issues surrounding UCH's payments to the city, TABOR author Douglas Bruce disagrees.

Even City Council President Pro Tem Jan Martin, the deal's biggest cheerleader, has her doubts.

"I'm nervous," Martin said in an interview Friday, hours after the city touted having removed the "last road block" to the partnership with UCH. "But we've been assured everything will work out, and we're going to have to see how it plays out."

The dispute

Three years in the making, the lease to UCH is designed to enable Memorial to affiliate with a larger system. Procedures and practices would be standardized to control costs in an era of declining health care reimbursements from insurers.

In exchange for leasing Memorial for 40 years, UCH will pay the city $259 million up front, of which $185 million is designated for PERA. The rest is designated to go into a community foundation dedicated to health care.

The city filed a lawsuit Aug. 15, claiming it owes PERA nothing because Memorial workers will be fired by the city and hired by UCH — which doesn't constitute a "termination" under the PERA statute. Thus, PERA termination provisions — including an employee vote in which 65 percent approve of the move, and PERA board consent — aren't applicable.

The city argues it has never paid for future retirement benefits when Memorial employees have resigned or were axed; why should it pay now? "The Termination Provisions do not apply when a public hospital that participates in PERA is sold, leased, or otherwise transferred," the city lawsuit states. It gives no examples, however.

On Aug. 31, PERA filed a lawsuit that named as defendants not only the city, but also UCH and its members, and sought $220 million to assure Memorial employees' retirements are covered. PERA also sought an order barring the lease transaction from closing until the issue is resolved.

PERA argued that the city has acknowledged the obligation to PERA for three years, starting with a citizen review process in 2010. In October that year, Memorial paid the costs of an actuary who calculated the amount owed. That amount isn't known, but Memorial paid $251,342 for the study, records show.

A subsequent actuary study conducted by PERA in January 2011 found the city would owe $245 million, though that number dropped to $191 million in yet another PERA study in July 2011.

The city's recognition of its PERA liability continued with the City Council Task Force on Memorial, formed in 2011, and its drafting of a request for proposal late that year. "In the RFP," PERA's lawsuit states, "the City described in detail all of Memorial's assets and liabilities and devoted one full page to analyzing and cautioning potential bidders of Memorial's PERA liability." The city went so far as to inform potential bidders that the "amount in controversy" was $191 million, the lawsuit continues. Bidders offered various sums to cover the liability.

PERA's Aug. 31 lawsuit posed a huge problem, because the lease requires Colorado Springs to use "reasonable efforts to resolve the PERA Liability in a manner that does not result in any liability or other obligation of the Lessee [UCH]" and its affiliates. The lease also mandates that to finalize the lease, "No action or proceeding before any Governmental Entity or any court or legal tribunal shall be pending that will restrain or prohibit the Transactions."

Thursday night, the city issued a statement saying PERA would withdraw its lawsuit and promise not to drag UCH into the fray in the future. The city, in turn, had agreed to impound its entire $259 million payment from UCH pending resolution of the case, which is to begin anew with the city filing a lawsuit in Denver District Court.

The fallout

If the city loses in court, PERA will get its money, plus the statutory interest rate of 8 percent. So if PERA is awarded $220 million, the city might have to pay $237.6 million. That would leave the city with only $21.4 million as proceeds, though it also will receive a $5.6 million annual payment for 30 years from UCH.

But if the city wins in court, and succeeds in paying nothing, there may be other consequences.

Without payment for Memorial's workers — who comprise 25 percent of the Local Government Division's active members — PERA predicts a meltdown of that division. It notes that at 2011's end, the division already was short $1.3 billion in future benefits to retirees, due in part to poor investment performance during the recession.

PERA says Local Government members left behind after Memorial's departure, including the city of Colorado Springs and Springs Utilities, would be stuck plugging Memorial's gap.

"If a large employer leaves the plan, the liabilities associated with the benefits earned by their employees (if not paid for upon exit of the employer) would be shifted to the other employers in the division trust," PERA's communications director Katie Kaufmanis says in an e-mail response to questions.

If the city is forced to pony up on behalf of city and Utilities workers to close the gap, Martin says, she doesn't know where the money would come from. Asked if UCH's up-front money could be spent that way, she says, "I don't think we're ready to answer that."

Besides the city and Utilities, 142 other agencies participate in the Local Government Division, among them the city of Pueblo — where officials are already angry with Colorado Springs over a lack of stormwater management that befouls Fountain Creek — and dozens of fire protection districts, water providers, cities, towns and counties statewide.

PERA itself can't automatically increase the employer and employee contributions required to make the division solvent. "Only the Colorado General Assembly determines contribution rates in the Local Government Division of PERA," Kaufmanis writes.

Which could set the stage for an epic legislative debate over whether PERA should be further bolstered by higher charges or allowed to go bankrupt, wiping out the retirements of thousands of public workers — with Memorial and the city of Colorado Springs being blamed for triggering the feud.

All that said, Martin isn't willing to let the city take heat for what she sees as someone else's mistake.

"The gap is PERA's problem, not the city's problem," she says. "You can't help but wonder if PERA had been more realistic and charged actual numbers if we would be in this position. This is a question that has been on the table for a very long time — PERA and its viability. Maybe it's a time to let the courts decide what the best future is for PERA."

The city must bear its own legal costs for the PERA litigation and has hired Hogan Lovells, a firm Mayor Steve Bach's administration has used almost exclusively in the last year to handle a range of sensitive issues. But Martin stresses the city is still searching for that "win-win" solution with PERA.

Dealing with debt

In addition to dealing with the PERA dilemma, the city must pay off Memorial's $310.6 million in debt (figured as of Aug. 31) and hope there's enough capital left to give UCH $42.4 million, as mandated by the lease provisions.

To do that, the lease calls for the city to receive Memorial's cash on hand, which stood at $286.5 million as of July 31. The city also will get Memorial's investments ($27.1 million) and bond reserve funds ($24.1 million), bringing the total to $337.7 million.

Melcher says the city will come out ahead, but exactly where it will stand after paying UCH and paying off the debt isn't known. Memorial spokesman Brian Newsome says the calculation is currently being computed.

If there's extra money, the city keeps it. If more is needed to pay UCH, the city must pay it. The likely source would be the $74 million payment from UCH — the same source the city will rely on to fill any gap in PERA liability.

As for debt, Memorial has four bond issues outstanding and a $66.6 million loan from BBVA Compass bank. Melcher tells the Independent that some bond debt and the Compass loan will be paid off immediately, while other bond debt that carries prepayment penalties will be paid over time.

But Melcher says the Memorial enterprise, not the city itself, will carry the debt and receive UCH's payments — to comply with TABOR, which requires voter approval of debt and restricts how much new revenue the city can receive without refunding it to voters or asking permission to keep it.

Bruce argues that TABOR defines an enterprise as a government-run business, and questions whether Memorial will meet that definition after UCH takes over. He also says payments to the foundation would constitute revenue for the city, though Melcher asserts the payments will go to the foundation via Memorial, thereby sidestepping the TABOR requirement.

All this, plus other questions related to city revenue restrictions, must have even Council feeling unsure; Melcher says it has asked for a written legal opinion on these matters.

"This is a mess," Bruce says, "and is going to be a mess for a long time."

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